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Optimal deterrence and inducement of takeovers: An analysis of poison pills and dilution

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Author Info
Molin, Johan (Department of Finance)
Abstract

The paper presents a theoretical alternative to the commonly held belief that poison pills affect shareholder wealth negatively. Specifically, the paper models how ex ante shareholder wealth can be maximized with contractual provisions that resemble poison pill plans and, reversely, voluntary dilution à la Grossman and Hart (1980) by allowing an optimal choice of takeover probabilities and premia. The model's predicitions are consistent with recent empirical evidence [Comment and Schwert (1995)]. The paper shows that, under optimal employment of the proposed provisionsa, the comparative statics on takeover probabilities and premia differ partially from those proposed in Shleifer and Vishny (1986). As an extension, an analysis of the wealth effects of changes in the control threshold, as implied by, e.g., supermajority rules and a mandatory bid rule, is conducted.

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Publisher Info
Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 102.

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Length: 34 + vii pages
Date of creation: Feb 1996
Date of revision:
Handle: RePEc:hhs:hastef:0102

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Related research
Keywords: Takeover defense; poison pills; dilution;

Find related papers by JEL classification:
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

References listed on IDEAS
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  1. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April. [Downloadable!] (restricted)
  2. Hirshleifer, David & Titman, Sheridan, 1990. "Share Tendering Strategies and the Success of Hostile Takeover Bids," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 295-324, April. [Downloadable!] (restricted)
  3. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May. [Downloadable!] (restricted)
  4. Comment, Robert & Schwert, G. William, 1995. "Poison or placebo? Evidence on the deterrence and wealth effects of modern antitakeover measures," Journal of Financial Economics, Elsevier, vol. 39(1), pages 3-43, September. [Downloadable!] (restricted)
    Other versions:
  5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  6. McWilliams, Victoria B, 1990. " Managerial Share Ownership and the Stock Price Effects of Antitakeover Amendment Proposals," Journal of Finance, American Finance Association, vol. 45(5), pages 1627-40, December. [Downloadable!] (restricted)
  7. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring. [Downloadable!] (restricted)
  8. Ryngaert, Michael, 1988. "The effect of poison pill securities on shareholder wealth," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 377-417, January. [Downloadable!] (restricted)
  9. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law & Economics, University of Chicago Press, vol. 26(2), pages 327-49, June.
  10. Grossman, Sanford J. & Perry, Motty, 1986. "Perfect sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 39(1), pages 97-119, June. [Downloadable!] (restricted)
  11. Bergström, Clas & Högfeldt, Peter, 1994. "An Analysis of the Mandatory Bid Rule," Working Paper Series in Economics and Finance 32, Stockholm School of Economics.
  12. Ambrose, Brent W. & Megginson, William L., 1992. "The Role of Asset Structure, Ownership Structure, and Takeover Defenses in Determining Acquisition Likelihood," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 575-589, December. [Downloadable!]
  13. Sanford J. Grossman & Motty Perry, 1986. "Sequential Bargaining Under Asymmetric Information," NBER Technical Working Papers 0056, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Hertzel, Michael G & Smith, Richard L, 1993. " Market Discounts and Shareholder Gains for Placing Equity Privately," Journal of Finance, American Finance Association, vol. 48(2), pages 459-85, June. [Downloadable!] (restricted)
  15. Nathan, Kevin S. & O'Keefe, Terrence B., 1989. "The rise in takeover premiums : An exploratory study," Journal of Financial Economics, Elsevier, vol. 23(1), pages 101-119, June. [Downloadable!] (restricted)
  16. Dodd, Peter & Ruback, Richard, 1977. "Tender offers and stockholder returns : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 5(3), pages 351-373, December. [Downloadable!] (restricted)
  17. Burkart, Mike, 1995. " Initial Shareholdings and Overbidding in Takeover Contests," Journal of Finance, American Finance Association, vol. 50(5), pages 1491-1515, December. [Downloadable!] (restricted)
  18. Stulz, Rene M & Walkling, Ralph A & Song, Moon H, 1990. " The Distribution of Target Ownership and the Division of Gains in Successful Takeovers," Journal of Finance, American Finance Association, vol. 45(3), pages 817-33, July. [Downloadable!] (restricted)
  19. Mark Bagnoli, Barton L. Lipman, 1988. "Successful Takeovers without Exclusion," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(1), pages 89-110. [Downloadable!] (restricted)
  20. Brickley, James A. & Coles, Jeffrey L. & Terry, Rory L., 1994. "Outside directors and the adoption of poison pills," Journal of Financial Economics, Elsevier, vol. 35(3), pages 371-390, June. [Downloadable!] (restricted)
  21. Sanford J. Grossman & Oliver D. Hart, 1987. "One Share/One Vote and The Market for Corporate Control," Working papers 440, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  22. Lucian Arye Bebchuk, 1988. "Takeover Bids below the Expected Value of Minority Shares," NBER Working Papers 2524, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  23. Walkling, Ralph A., 1985. "Predicting Tender Offer Success: A Logistic Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 461-478, December. [Downloadable!]
  24. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-88, June. [Downloadable!] (restricted)
  25. Jarrell, Gregg A & Bradley, Michael, 1980. "The Economic Effects of Federal and State Regulations of Cash Tender Offers," Journal of Law & Economics, University of Chicago Press, vol. 23(2), pages 371-407, October.
  26. Wruck, Karen Hopper, 1989. "Equity ownership concentration and firm value : Evidence from private equity financings," Journal of Financial Economics, Elsevier, vol. 23(1), pages 3-28, June. [Downloadable!] (restricted)
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